Reserves and Business plan

[Chase Tompkins]

Hello, I currently have 3 questions to ask. 

When starting out as a new real estate investor do you absolutely need reserves? I was talking with a local investor and he was explaining how I need about 20k in reserves of course that would take me forever. I understand it helps just in case something goes wrong. I do not want to wait until I have 20k in reserves which could take years in your opinion is this an absolute necessitate? 

The second question when it comes to getting hard money should I be sending these people deals that I know make a decent profit to show that I am out here looking at deals with positive cash flow?

The 3rd question is are the homes on realtor or Zillow not the way to go when finding deals should I be really out to look for worn-down homes throughout the neighborhood?  I heard I few opinions explaining you can't find a good deal through those websites I just wanted more opinions. 

Thank You for your input and opinions. 

[Eric Gerakos]

Yes, you absolutely need reserves.

[Bjorn Ahlblad]

Being an investor is a risky business, there are two absolute necessities in my view: knowledge and money. Without both you will not last long.

[Nathan A.]

Relentlessly focus on looking for ways to increase your income or decrease your expenses so you can save up for the reserves faster.

[Leo R.]

Quote from @Chase Tompkins:

Hello, I currently have 3 questions to ask. 

When starting out as a new real estate investor do you absolutely need reserves? I was talking with a local investor and he was explaining how I need about 20k in reserves of course that would take me forever. I understand it helps just in case something goes wrong. I do not want to wait until I have 20k in reserves which could take years in your opinion is this an absolute necessitate? 

This depends on factors like the type of property you're buying and its risk profile, your income, your ability (or inability) to do your own repairs, the amount of the mortgage payment, the exposure to vacancy, etc., etc.  Different properties will have completely different risk profiles--the reserves needed for a 1500 sq ft A grade house are completely different than the reserves needed for a 5000 sq ft C grade house, for example. A house in rural Kansas will have a completely different exposure to vacancy than a house in the A grade neighborhoods of Miami.  A house with a brand new roof requires less in reserves than a house where the roof only has 5 years left. etc., etc.  It's not a matter of having reserves "just in case something goes wrong", it's a matter of "WHEN something goes wrong"--unanticipated expenses are an unavoidable part of REI.  So, how much you need in reserves depends on how much the property costs to operate--thus, it's essential to understand what a property will cost you to operate before you buy. This is why proper due diligence is the foundation of successful REI.

The second question when it comes to getting hard money should I be sending these people deals that I know make a decent profit to show that I am out here looking at deals with positive cash flow?

If you're not yet sure about what a property costs to operate and how much you need in reserve, I'd suggest holding off on looking for hard money until you're more experienced with the fundamentals of REI.  If you're a beginner, I'd suggest starting with a more beginner-friendly strategy (like house hacking using a conventional owner-occupant 30 yr mortgage, which has the best terms). 

The 3rd question is are the homes on realtor or Zillow not the way to go when finding deals should I be really out to look for worn-down homes throughout the neighborhood?  I heard I few opinions explaining you can't find a good deal through those websites I just wanted more opinions. 

It depends on what strategy you're using, what skillset you have, and what your goals are. If you have the time and motivation to find off market deals, go for it (but that's an operation that requires a certain commitment and skillset, and it's a relatively steep learning curve for a beginner). All other things being equal, the easier route for a beginner is to buy a property on the MLS. It is possible to find good investments on MLS-fed sites like Zillow. In fact, the bulk of my portfolio was purchased off the MLS during one of the worst buyer's markets in US history, yet my portfolio performs very well.  It's all about understanding how to find a property that has hidden value or a value add opportunity that other buyer's don't see, and then taking advantage of that (which is an entire topic in and of itself)

Thank You for your input and opinions. 

Good luck out there!

[Sherri D.]

In my opinion, you should work to build reserves over time, but it doesn't mean you have to wait to invest. When I bought my first property I had $0 dollars and not so good credit. But I am good at finding good deals, so I went the private investor route. The true private investor route where you're putting a person's retirement funds or other discretionary funds a person may have, to work for them. I pay my private investors more money for the privilege of putting their money to work for them, but it meant no down payment, no credit check, no tax returns or bank statements and no paying for an appraisal upfront either. A true private investor decides if they want to invest based on the merits of the deal. They may want to talk to you to make sure you know what you're doing, but that's it. I've never had a true private investor ask me for a down payment, credit score, bank statement or tax return. I say true private investor because some people will say they are private investors or work with or broker for private investors, but they are really hard money lenders who do require a down payment, loan costs, pay for an appraisal and bank statements. And if it's a rehab project, a hard money lender will want to see that you have at least 20% of the rehab budget to start. That's where the reserves comes in. But as I said, a true private investor will invest in the project and not ask for any of that other stuff. And there are no loan costs. The only loan costs I've ever paid my private investors is their wire fee.

Now if you go the hard money route, bring a vetted deal to them that you're ready to move forward with and already have under contract. Then you'll fill out their application, they'll pull your credit, ask for your bank statements. The percentage they will lend on the project will be determined by your credit score. For a score 700+ they'll lend 85-90% of the purchase price plus 100% of the rehab. Lower score, that 85-90% can go down to 55-65%. But they do usually still do 100% of the rehab. But since you'll have to come up with the other 10-45% of the purchase price plus their loan costs-which are very expensive usually at least 10% of the loan amount-that's why you'll need the reserves. It's also why they want your bank statements, to verify for themselves if you have the funds necessary. Also, if you have rehab they are paying for, as I said before, they are going to want to see you have at least 20% of the rehab in your account because they will reimburse you for the rehab as you go along. And their interest rates are a little higher as well. They are very good for certain situations because they do have a lot less red tape then a bank, but it will still take 4-6 weeks to close from application to sitting at the closing table most of the time.

As far as how to find the deals, do whatever works for you. I use my realtor. Hope this helps!

[Chase Tompkins]

Thank you for the information, I am having trouble finding private money is this mainly through networking?

[Account Closed]

Well, you could househack a small multi family with an FHA loan for a few grand. That can eliminate your housing cost and help a lot towards saving some reserves.

Private money usually wants to see some sort of investment track record. 

[Sherri D.]

Depends on the private investor. As I said I bought my first building with private money with no track record. But I had a good deal. Since then I've actually bought all my buildings with private money except one.

[Eliott Elias]

You don't need reserves to start investing. You need to spend all your time looking for deals to then find the money. Way too many people with money out there. You could be working just as hard to find a deal rather than saving up 20k. 

[Chase Tompkins]

I agree with you 100% did you start out the same way? how did you start out? With private money?

[Mike Klarman]

Money is a necessity of the process.  Someone has to come up with the down payment, fees, title costs, insurance, legal costs, underwriting costs.  You are asking if YOU need to be the one to bring those things and the answer is no but someone has to and whoever told you 20k must have took Doc Brown's time Machine from 1985.

Let's say you buy a house for 100k and it needs 50k work.

20% Downpayment - 20k

2% orig. fee - 2,600 (Loan amount is 130k)

Closing costs - 1500 for things like legal fees, wiring fees, processing fees

Title - Figure 1,200

Ins - figure 800

Your loan payment at 130k and 11% interest with interest only payments is 1200 per month.  They want to see 9 payments in your account in case you need to carry that long: 8,400.

So for every 100k in real estate value you can expect to lay out 34,500 about.  So if something costs 200k - be prepared to have 70k in the bank or you won't be able to close.

Ok, so you don't have the money, you can still be in real estate. Because while money is a necessary part, so is the asset. Someone has to find a deal. That requires someone getting an education, making connections, then spending their time hunting. Spend the 600 bucks for your real estate license and get access to the MLS and you'll also learn all the rules and regulations for real estate, then join local associations. Meet investors here.

Knock on doors.  Get a card made up.  Knock on doors of older houses and tell them if they ever want to sell to call you first.  You'll get their RE fees picked up for them.  That will peak their interest. In most pocket listings the deal is so good that the investor does not mind doing that to get it done.

Be that guy who has access to inventory and great deals and they money will come running.

[Cecil L. Russell]

As a new investor myself, residing in Amarillo, I have conducted research and analysis of the industry. In my opinion, opting for 'Subject To' or 'Lease Options' through Owner Financing represents the most lucrative investment strategy. However, acquiring sufficient information to execute such transactions poses a significant challenge.